Inside some 600 J.C. Penney outposts across the United States, you will find mini Sephora stores flanked with the brand’s signature black-and-white striped decor and packed with beauty products, ranging from Rihanna’s Fenty Beauty foundations to Drunk Elephant’s lineup of skincare serums and hydrating face masks. For over a decade, the two companies have engaged in such a “stores-within-a-store” deal, in connection with which the LVMH Moët Hennessy Louis Vuitton-owned beauty retailer offers products from more than 200 beauty brands, including its own collection of products, and serves as J.C. Penney (“JCP”)’s “exclusive source of beauty offerings within [its] stores.”
Shedding light on the partnership in a since-settled case that it filed this spring, JCP asserted that it entered into the shop-in-shop deal back in 2006 for the “benefit both of the parties.” Sephora, which maintained less than 200 of its own brick-and-mortar outposts at the time, would expand its physical footprint (and its reach to cosmetics-seeking consumers) without having to roll out sweeping, standalone stores. At the same time, JCP – in line with what other department stores had been doing for years – would be able to provide added value for its in-store shoppers, differentiate its offerings from competitors, and ideally, boost foot traffic.
While the parties’ partnership thrived for more than a decade, it appeared to be on the rocks as of April when JCP – just days before its Chapter 11 bankruptcy filing – initiated a contract-centric lawsuit against Sephora, alleging that the beauty retailer had threatened to terminate the parties’ 14-year-running deal. In the midst of the COVID pandemic, JCP told a federal court in Texas on April 27 that Sephora had warned that it would walk away from the deal immediately unless JCP offered it more favorable terms.
It appeared as though Sephora may have been looking for an out of its contract, which is not slated to expire until early 2023, amid financial turmoil for JCP and more maybe more significantly, large-scale shifts in the retail landscape, as COVID was busy accelerating an already-existing movement away from brick-and-mortar shopping and towards increased e-commerce consumption.
The parties ultimately managed to settle their differences in a timely manner, stating in a joint announcement on May 7, less than two weeks after JCP filed suit, that they had “reaffirmed their long-standing partnership to operate Sephora inside JCPenney.” They stated that “both companies worked constructively to resolve outstanding legal matters and have agreed to mutually beneficial revisions to their joint enterprise operating agreement.”
A Growing List of Deals
Among those revisions: a likely lifting of any exclusivity clauses that may have previously prevented the parties from engaging in similar partnerships with third parties, as Sephora has since announced that it will embark on another deal, one that will see it open 850 shops in Kohl’s stores across the U.S. The new tie-up – in connection with which Sephora will bring more than 100 “carefully curated beauty brands” to the 65 million Kohl’s customers in the U.S. – “is an excellent example of two customer-centric, purpose-driven companies leveraging each other’s strengths to make aspirational beauty far more accessible to millions of customers all across the country,” Kohl’s CEO Michelle Gass said in a statement on December 1.
At the same time, Jean-André Rougeot, president and chief executive officer of Sephora Americas, spoke out about the newly-announced venture, saying, “This is not a pop-up collaboration, but an investment our brand partners can rely on for the long-term.” (Such a focus on an enduring partnership with Kohl’s might suggest that come 2023, Sephora very well may not seek to renew its deal with JCP, or at the very least, is leaving its options open as the pandemic continues to play out and impact retailers on differing bases).
Interestingly, Sephora is not the only one doubling-down on a shop-in-shop strategy; the Sephora x Kohl’s news follows just weeks from Ulta and Target revealing a partnership of their own. Sephora’s beauty rival and the Minneapolis-headquartered big-box retailer announced on November 10 that Ulta will open makeup and skincare shops inside of “hundreds of” Target stores, with a roll out starting in the second half of 2021. According to CNBC, “Each ‘shop-in-shop’ will be about 1,000 square feet with more than 40 beauty brands and a rotating assortment of products from hair care and fragrances to lip gloss.”
Target CEO Brian Cornell and Ulta CEO Mary Dillon told CNBC that “they see the strategic partnership as a long-term deal that will catch customers’ attention and drive higher sales,” with Target standing to gain “a unique traffic driver in a fast-growing merchandise category, while Ulta will gain visibility on [Target’s] store shelves and website, [which] has expanded its reach during the pandemic.”
In addition to seeking to build on pandemic-centric momentum primarily for e-commerce, both partnerships appear to be anticipating a post-pandemic return to stores, which will require brands and retailers to “facilitate better retail experiences,” according to Gentler consultant Michael Gatti, whether that be through “engaging and creative in-store experiences” or the introduction of an expanded range of products, such as a revolving roster of buzzy new beauty brands, something that Target has been increasingly working on in recent years.
As for Target, in particular, Cornell said the deal with Ulta aims to “build on momentum we have in the category and investments we’ve been making for years in beauty,” which he calls “a very important category [that] we continue to believe [is] going to be a high-growth category.”
Contract Considerations
Looking beyond the potential easing of exclusivity restrictions that may have previously existed between Sephora and JCP, these new tie-ups with mass-market retailers present some additional – and interesting – contract considerations of their own. Namely, there are potential issues when it comes to luxury brands and other high-end cosmetics companies that currently stock with the likes of Sephora and Ulta, and the extent to which their ongoing agreements with these retailers permit – or maybe more likely, limit – the stocking of their products by otherwise unauthorized third-parties, such as Target and Kohl’s.
While Kohl’s, for instance, currently boasts a lineup of fragrances from Burberry, Gucci, Versace, and Dolce & Gabbana, among those of other high-end brands (something Target largely lacks), both retailers’ product lineups are almost entirely devoid of luxury beauty/cosmetics offerings, such as those from big names like Tom Ford, Chanel, and Dior, as well as upscale beauty brands La Mer, SK-II, and Dr. Barbara Sturm, etc., all of which are currently being offered up in Sephora’s own stores and its e-commerce site. Similarly, Ulta boasts a long list of premium brand partners, including Dermalogica, which has taken issue with – and (since-resolved) legal action against – Target’s sale of alleged “gray market” versions of its goods in its brick-and-mortar stores in lieu of an authorized distribution agreement.
With the foregoing in mind, and given the notoriously controlling and image-conscious nature of certain luxury brands, which inevitably takes the form of iron-clad contractual clauses regarding distribution, chances are, at least some companies will point to applicable restrictions in their contracts with Sephora and/or Ulta to push back against having their goods put on the shelves of their new big-box retail chain partners. In short: Chanel fragrances will not be available for purchase at an Ulta shop-in-shop at Target anytime soon, just as Dr. Sturm’s face cream will almost certainly not be coming to Kohl’s by way of Sephora.
The potential inclusion of specific distribution provisions – either at the outset or as a result of further negotiations – is not light-years away from how at least some savvy certain luxury brands have tacked on provisions to their contracts with their stockists to ensure that in the case of bankruptcy and/or liquidation, for instance, their wares are not subject to across-the-board price-slashing. A source for TFL revealed that LVMH reached such an agreement with Barneys New York, which it negotiated with the retailer at the time that its bankruptcy was announced in August 2019 in order to ensure that its brands, including Givenchy and Celine, would not be marked down as part of the retailer’s liquidation.
In light of such proliferating shop-in-shop partnerships (both in the beauty space and beyond), brands are encouraged to carefully consider the terms of their contracts with authorized stockists, including by anticipating situations such as these, particularly as control continues to play a key role when it comes to brands and their positioning.
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